CH. 13

“ MODUS OPERANDI ” OP BANK-RATE 201

in the official rate does not alter the rates effective inthe market, we shall say that it is “ ineffective It willalso be convenient to use the term “Bond-rate” todesignate the complex of interest rates effective in themarket for the borrowing and lending of money forlonger periods ; and we shall use the term “ market-rate of interest ” for the complex of bank-rate andbond-rate. The relationship between the official bank-rate, the “ effective ” rate of discount, and the market-rate of interest will be discussed in Chapter 37. Weshall here assume that changes in bank-rate affectthe market-rate of interest in the same direction.

The General Theory of Bank-rate, apart from thecomplications and elaborations which will occupymany succeeding chapters, can be broadly enunciatedas follows :

We have argued that a rise ( e.g .) in the market-rate of interest upsets the balance between the value ofinvestment and saving, unless a corresponding rise inthe natural-rate occurs at the same time. It may dothis either by stimulating saving or by retardinginvestment.

In the case of saving, the effect of a change in therate of interest is direct and primary and needs nospecial explanation, though the amount of the effectmay often be quantitatively small in practice, especi-ally over the short period. Thus a rise will have adirect tendency to increase the rate of saving, unlessit is needed to offset a decline in saving which wouldhave occurred, for other reasons, in its absence.

But its effect in retarding investment needs a littlemore explanation. Investment-goods are not identicalwith capital-goods (cf. their definitions onp. 130 above),being somewhat more comprehensive. But a retarda-tion of investment will result, sooner or later, from aa reduction in the output of capital-goods. Now, fromthe point of view of individual entrepreneurs, therewill be no occasion for a reduction in the output of